Lawyers help push pay inflation in services sector to a 10-year high

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The Independent Online

Pay in Britain's services sector is growing at its fastest pace for a decade despite fears over the UK economic outlook, the CBI said yesterday.

Pay in Britain's services sector is growing at its fastest pace for a decade despite fears over the UK economic outlook, the CBI said yesterday.

The employers' organisation said pay awards averaged 4.6 per cent in the three months to July compared with 3.9 per cent in the previous quarter.

The CBI said this was the highest rate of growth since the second half of 1991, when the data was only recorded biannually. In contrast, manufacturing pay deals were unchanged at 2.9 per cent in the latest quarter, although that increase is also above inflation.

While only a handful of manufacturers handed out pay deals over 6.5 per cent, more than one in 10 services companies agreed to these rates.

Last week official figures showed total average earnings accelerated to 4.8 per cent in June from 4.6 per cent in May. The Bank of England sees any rate above 4.5 per cent as a potential inflationary threat. However Sudhir Junankar, the CBI's associate director of economics, said that inflation – which has remained below the Government's target for 28 months – was under control. "We remain confident our data do not put the Government's inflation target at risk," he said.

The CBI said the spike in service sector pay deals was influenced by a batch of high awards in May among professional services firms, including accountants, lawyers and business consultants.

These firms said the most important pressure on pay was the need to recruit and retain staff. The CBI said that as this involved a small number of people, it would not have a huge impact on average earnings.

Manufacturers, who are now in recession, said their inability to raise prices – as evidenced by the latest producer prices data – was the most important downward pressure on pay.

The best clue to the direction of the economy and interest rates will come on Wednesday when the first estimate of GDP growth in the second quarter is revised. Most economists expect the figures to remain unchanged with quarterly growth of 0.3 per cent and annual growth of 2.1 per cent. The key new information will be extra detail on output and a first look at expenditure, both by consumers and the Government.

National Statistics, the government department, has a tendency to underestimate growth and rates in the last quarter of last year and the first quarter of this were revised up.

Philip Shaw, chief UK economist at Investec, said: "Even though forecasting revisions is a hazardous business, we are inclined to suggest that the risks are titled towards a downward revision to 0.2 per cent."

The "two-speed economy" will be in focus today when trade figures are expected to show export weakness while lending figures will point to the strength of the housing market.